When your credit or income isn't fabulous, a cosigner might help you secure a mortgage. A cosigner is a person whose creditworthiness helps qualify you for a loan. He signs all loan documents -- along with you -- as a guarantee of payment to the lender in case you default on the loan.
Your cosigner's very first signature goes on the mortgage application. She signs the documents that give the lender permission to process her information for the loan. The lender needs this signature to pull credit reports on the cosigner. The lender also verifies income through pay stubs, bank statements and tax return information.
Once you get that coveted mortgage loan approval, the lender drafts the loan documents. The loan contract contains wording showing that the cosigner promises to assume responsibility for the amount owed on the mortgage in the event you do not pay the bill. Both you and the cosigner sign the loan documents before the loan is finalized. Signing of the loan documents occurs at closing on the property.
At closing, you sign the security instrument, a deed in trust. This allow the lender to sell the property if you default on the payments. The cosigner does not receive property rights to the house. He does not sign the security instrument at closing.
Your cosigner takes on a lot of risk for your dream home. The Federal Trade Commission recommends instituting safeguards for your cosigner prior to the signing of the loan documents. These safeguards include limiting the cosigner's liability to the principal balance owed on the loan minus attorney's fees, court costs and late fees. Your cosigner may request immediate contact from the bank if you fail to pay the bill.
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